How the New Tax Bill Will Impact Homeowners, Buyers, and Sellers in 2018

The most significant tax bill since 1986 has just been approved leaving homeowners confused about how they will be affected. Beginning in 2018 the tax reform is expected to lower income taxes for many households. During the legislative process, many provisions that affect the housing market were altered before the final bill was approved. We are going to explain what the final tax bill contains and how it will impact homeowners, buyers, and sellers!

How will the tax plan affect homeowners and buyers?

The new law increases the standard deduction from $6,350 to $12,000 for single filers and from $12,000 to $24,000 for married/joint filers. This will make many homeowners forgo itemizing their mortgage interest and property tax deductions because it would end up being lower than the standard deduction.

Zillow reported that under the old law approximately 44% of US homes are worth enough for it to make sense to itemize the mortgage interest deduction instead of taking the standard deduction. With the new bill that number falls to 14.4%.

Mortgage Interest Deduction allows homeowners to lower their taxable income. The tax bill has lowered the amount that can be deducted for new mortgage loans. For buyers that took out loans out after 12/14/17, or buyers who plan to buy in 2018, the mortgage interest deduction has been lowered from $1 Million to mortgages up to $750,000.

If you already own a home the deduction will stay unchanged for loans up to $1 Million. Current homeowners will be able to continue deducting interest paid on their mortgage. In the majority of the united states, home values don’t exceed $750,000. This means the deduction loss will mainly affect cities with more expensive housing markets.

Homeowners can still choose to refinance mortgage debts up to $1 million that existed before 12/14/17 and still deduct the interest as long as the new loan is not higher than the amount refinanced.

The states that will be most affected are blue states, including New York, California, Connecticut, and Hawaii. California accounting for 45.7%.

The cap on mortgage interest will return back to $1 million in 2026 for all homes.

The home sale capital gains exclusion remains the same! Homeowners will continue to be entitled to exclude up to $500,000 ($250,000 for single filers) for the capital gains or profits that come when they sell a primary residence after having lived in the home for at least two out of the past five years before the sale.

The state and local tax deduction allows homeowners to lower the amount of their taxable federal income. The new tax bill limits the deductibility of property, state, and local income taxes to a $10,000 deduction limit for both single and married filers. This means homeowners in states where home prices and property taxes are high will likely face larger tax bills next year.

For homeowners that want to avoid this change by prepaying 2018 state and local taxes before the new year, New York Governor Andrew Cuomo signed an executive order that will allow residents to prepay part or all of their 2018 property tax.

The interest remains deductible on second homes but only up to $750,000 for new mortgages and stays at $1 Million for existing. The mortgage interest is stated to return to $1 million in 2026 for primary residences but there is currently no provision that would bring back the tax break for second homes.

Starting in 2018, the interest paid on loans for vacation homes is no longer deductible.

However, if you rent your vacation home for at least a portion of the year you will be allowed to write off those costs which inevitably includes a percentage of the mortgage interest and property taxes.

The current law allows a deduction for interest paid on up to $100,000 of home-equity loans. Beginning in 2018 interest paid on home-equity loans will no longer be deductible. The interest will only be deductible if the proceeds are used to improve the home. This will be the last year you can write off the interest paid until 2026 when this provision will return back to the current law.

Starting in 2018, moving expenses will no longer be deductible except for members of the military.

This tax is applied to the transfer of property after someone passes away. Previously set at $5.49 million for individuals and $10.98 million for married couples, the new law doubles the estate tax exemption.

The bill remains the same for the low-income housing tax credit at 4%. This will continue to fund approximately a third of all affordable housing construction.

Commercial Real Estate: Investment and Business Properties

The tax bill will not affect the current 1031 exchange of property. A like-kind exchange or 1031 exchange is the exchange of one business or investment for another. Typically when you sell a business or investment property you have a gain or profit which you would have to pay tax on at the time of the sale. Section 1031 allows owners to defer paying tax on the gain if they instead reinvest in a similar or "like-kind" property. If your property meets the 1031 requirements, you'll continue to be entitled to either no tax or limited tax at the time of the exchange.

When you exchange a real estate investment instead of selling, you can do so without the IRS recognizing it as a profit or capital gain. This allows your investment to continue to grow profit tax-deferred. There's still no limit on how many times you can choose a 1031 exchange. You will be able to continue not paying tax until you sell the investment.

This still does not apply to any primary residences.

The National Associaton of Realtors provided real-life examples to illustrate how the changes to the standard deduction, repeal of personal exemptions, mortgage interest and state and local taxes might affect a first-time homebuyer and a homeowner. Click here for details and a breakdown of the new law vs. current law.